As the unofficial
end of summer storms in over this long weekend in the States, I find
myself pondering the changing demand profiles over the lifespan of a
typical secular bull market in gold.

The word secular,
which has a dictionary definition of “going on from age to age”, is
used to describe any major market trend that runs for a long
period of time. For a general mental yardstick, I think that a bull
or bear market running for a decade or so lands right smack in the
middle of the annals of seculardom.

The Great Gold
Bull of the 1970s, for example, ran from 1970 to early 1980, exactly
one decade. While gold did not rise in every single year, when you
look at a long-term chart (see below) this secular bull market is
utterly unmistakable. Secular bulls in general stocks tend to last
even longer, usually
two decades each, like the Great Stock Bull of the 1980s and
1990s.

Since the average
investor really only has four decades in which to build his or her
fortune, from the ages of 25 to 65, any trend that runs for a decade
or more sure does feel like it is going on from age to age!
A secular bull or bear can easily run from a quarter to a half of an
entire average investing lifespan. Thus it is unbelievably
important to run with these primary trends since getting even
one wrong could cost an investor half their investing life. The
price for fighting these secular trends is staggeringly high.

On the short end
of the measuring stick, I think the absolute minimum amount of time
necessary for a trend to attain secular status is three years. If
any trend runs for less than three years, then it should be
considered cyclical instead of secular. Thus it is pointless
to even think in secular terms until a trend has been fire-tested
and battle-proven for at least three years. Which brings us to our
current gold bull.

On April 2nd,
2001, gold was battered down to a devastating 22-year secular low
just under $257. This formed a massive double-bottom with similar
gold lows on
central-bank gold sales in late summer 1999. Prior to 1999,
even in nominal terms gold had not witnessed such dismal prices
since 1979, ages and ages ago. At the time in 2001 gold sentiment
was understandably horrendous, with high-profile predictions of
sub-$200 gold abounding. Yet, as markets are wont to do, gold’s
secular trend stealthily changed during its darkest hour.

As I hammer out
this essay exactly 41 months to the day later, gold’s glorious new
bull market is finally readily apparent to all. From April 2001 to
April 2004, the requisite three-year minimum necessary to catapult
gold’s current bull market into the elite ranks of seculardom, gold
has soared over 66% higher. Since we are already three-and-a-half
years into gold’s present bull, we have to start thinking in
secular terms. Only then can we begin to understand what
wonders might lay ahead for gold investors.

Now naturally the
tools used to analyze a strategic secular bull are far different
from those used to speculate on short-term tactical trends
oscillating within the primary secular trends. While
various
technicals tools are crucial for short-term tactical
speculation, long-term analysis is exclusively dependent on
fundamentals.

The most
foundational of all the fundamentals is supply and demand. As long
as demand exceeds supply, prices will be forced to rise over
the long term. This elegant mechanism is the ultimate way that free
markets allocate scarce supplies to those most willing to pay for
them. Eventually some new equilibrium price is found where supply
equals demand and the gold market perfectly clears, with no
long-term surplus or deficit.

As the invisible
hand of the free markets, really the collective buying and selling
decisions of every gold player on the planet, guides prices, signals
are sent to gold producers, consumers, and investors. The higher
the gold price goes, the more gold producers want to sell. Higher
gold prices lead to higher supplies of gold as miners around the
world rush to capitalize on the increased profit margins on their
product.

Of course mining
more gold is nowhere near as easy as producing an additional copy of
Microsoft Windows! Finding new gold deposits that are large enough
to mine is exceedingly difficult, and even once they are discovered
it takes years to dig shafts and spin a new mine up to
operational speed. For this reason, historically the total global
gold supply only grows by an average of a couple percent or so each
year. Faster growth is impossible at almost any gold price due to
the extreme difficulty and huge capital costs necessary to bring new
gold deposits to market.

Thus, on the gold
production end supplies are very inelastic to price. Regardless of
how high the gold price goes there will not be a flood of newly
mined gold as ramping up global gold production fast is simply not
viable. But there is another potential supply of gold beyond
mining, which comes from investors choosing to sell gold that they
have previously purchased.

Since gold is
rarely destroyed, virtually all the gold ever mined still exists in
various forms today, from bars sitting in secure vaults to jewelry
adorning beautiful women around the world. Investors who own this
gold can generally be divided into two distinct groups with vastly
different motivations, official central banks and private
investors. As these investors choose to sell their gold, it can
cause additional supply to come onto the markets at various times.

Central banks
rightfully see gold, the ultimate money over six millennia of human
history, as a threat to their fragile fiat-paper currencies, so they
tend to act irrationally. Rather than buying low and selling high
like a private investor, central banks buy and sell at the wrong
times. Central banks tend to exacerbate secular trends.

At the
end of long gold
bears central banks wrongly assume that gold is finally
becoming worthless so they sell and drive the bear lower. At the
end of long gold bulls they worry that their particular fiat
paper does not have enough gold backing so they buy and force the
bull higher. If the goofy bureaucrats who ran central banks had to
trade for a living, they would soon go broke by selling low and
buying high!

While private gold
investors tend to fear central banks due to their ominous
urban-legend status, I don’t believe central banks have any hope of
controlling gold action over longer periods of time. It is believed
that about 150,000 metric tonnes of gold have been painstakingly
chiseled out of the bowels of the Earth during all of world history,
and only about 20%, or 30,000 tonnes, is controlled by various
central banks today. While 20% is certainly not trivial, it is the
private investors that control the other 80% that really hold gold’s
destiny in their hands.

Since newly mined
gold can only grow total world supplies by a couple percent a year
at best, and central banks only control 20% of the above-ground gold
and tend to buy and sell at exactly the wrong times lengthening
secular trends, the real force to be reckoned with in the
gold world is private investors. It is to these private investors,
people around the world like you and I, that we must look to
understand secular gold bulls.

The key to a
secular gold bull is the demand or supply that private investors
generate worldwide as they buy or sell gold. It isn’t mining
supplies, it’s not central banks, but it is the collective gold
transactions of hundreds of millions or even billions of individual
investors worldwide buying and selling gold that ultimately sets its
price and determines its fortunes.

I believe that the
collective demand trends of private gold investors worldwide
effectively divide secular gold bulls into three distinct
demand-driven stages. In order to understand these stages and their
implications, we first have to understand the peculiar nature of
gold investment demand.

Normally in
economics, the lower the price of something the higher the general
demand for it. This is evident everywhere in society today, but
perhaps especially so in technology. Twenty years ago when a
computer cost $3000+, there weren’t a lot of families with
computers. Prices were high and demand was low. Yet as prices
gradually fell over the years demand increased far beyond the small
enthusiast market.

Today with a
decent computer for surfing the Web, e-mailing friends, and doing
office work only running $600 or so, computers are ubiquitous.
While the statistics say they are out there, I have yet to meet a
family without at least one computer in their home today. Whether
we are talking about computers, pizza, cars, whatever, the lower the
price the higher the demand grows for a particular product. This is
a normal downward-sloping demand curve.

But with gold, and
indeed most other investments, the demand curve is far from
normal. As all contrarians know, in the investment world the higher
the price of an investment climbs the greater demand becomes!
It is all backwards. While virtually no one wanted anything to do
with gold near $250 a few years ago, once gold soars to $2500
everyone will want a piece of it. In the financial world higher
prices don’t retard demand, instead they actually breed
demand!

The higher the
price of gold climbs, the more potential investors will become aware
of its impressive returns. As they buy in over time, their marginal
investment demand will drive gold even higher, putting it on the
radar of even more investors worldwide. This investor demand
creates a wonderful virtuous circle, with higher gold prices leading
to more interest and higher demand which in turn leads back to
higher gold prices and feeds the cycle. There is no better
advertisement for a particular investment than rising prices, as
most investors are not contrarians so they will only chase existing
well-established trends.

And remember that
private investors collectively control 80% of the world’s gold, so
if demand is growing in this realm it is almost irrelevant what the
mines can pull or what nefarious machinations the central banks
happen to be up to! The whole secular gold game unfolds in terms of
private investor demand for gold, as we are collectively the
dominating force in the gold market.

Thus it is not
only important to realize that it is not mines or central banks that
ultimately drive gold prices, but private investor demand, it is
also crucial to understand that global gold investment demand only
grows with higher gold prices. Using this high-level model
of gold supply-and-demand fundamentals, we can divide secular gold
bulls into three distinct stages based on pure global investment
demand.

Our lone chart
this week compares the Great Gold Bull of the 1970s with today’s
young secular gold bull. It is divided into the three distinct
stages of a secular gold bull, each of which is driven by evolving
demand profiles among private gold investors around the world. And,
lighting up my own long weekend, I am thrilled that we were able to
incorporate our old bull image which has been largely missing in
action in recent years. In my book any graph capable of sporting a
cartoon bull is a darned good one!

The first
important thing to note on this secular gold bull graph is the
typical parabolic shape of a secular gold bull. All secular bulls
that ultimately culminate in bubbles exhibit this distinctive
pattern of price increases continuously accelerating over time. As
this yellow parabola shows, this acceleration is almost
imperceptible in the early years, picks up dramatically in the
middle years, and is breathtaking in the final years. This pattern
was also witnessed in both the
NASDAQ and S&P 500
as well during their own recent secular bulls.

The left axis of
this graph corresponds to the blue line of the Great Gold Bull of
the 1970s. Interestingly, since we used monthly data, this 1970s
gold bull is even a bit understated. While the all-time monthly
high close for gold is under $700 as this graph shows, gold actually
soared to $850 per ounce briefly in January 1980 at the top of its
last mania!

The right axis
defines the red line, which is our current gold bull to date from
January 2001 to today in monthly terms. As you can see, the early
slopes of this gold bull and the early years of the 1970s Great Gold
Bull match remarkably well. Today, just as gold did from 1970 to
1973, it is once again stealthily climbing the initial modest
upslope of the yellow parabola. If our current specimen continues
to hold the course plotted before it in the 1970s, gold will
ultimately trade over thousands of dollars per ounce before this
decade ends!

I believe the key
to understanding this parabolic shape that all secular bulls ending
in bubbles assume is to understand the changing investment demand
profiles throughout a secular bull. The constantly accelerating
parabolic profile is driven by shifting investment demand over the
life of a secular bull. The higher an investment price gets, the
higher demand grows and a positive feedback loop is created.

Stages One, Two,
and Three of a secular gold bull are defined by the two major slope
changes in this standard secular-bull parabolic ascent. Each stage,
considered in turn, makes perfect sense when described in terms of
global investor demand.

Gold is ultimately
money, and during Stage One bulls it trades like another currency.
One of the primary reasons why the Stage One upslope is so moderate
is that the main reason gold rises initially is due to a devaluation
of the dominant currency in which it is priced, obviously the US
dollar today. As the
US dollar bear
has festered in recent years, and as the dollar eroded in the early
1970s, gold is a direct beneficiary of the dollar’s losses. As the
dollar grinds lower, the gold/dollar exchange rate rises.

Since Stage One is
currency-devaluation driven, the young gold bull is most noticeable
in terms of the dominant eroding currency. Since April 2001 gold’s
gains have been greatest in the US since it is the US dollar that is
devaluing. But from foreign-currency perspectives, such as
the Europeans’,
gold has traded largely sideways in recent years. Stage One gold
bulls witness gains that are roughly one-to-one with currency
losses, so they are most evident in local-currency terms.

Now since these
early Stage One bulls are only apparent to contrarian
investors in the country with the dominant devaluing currency,
overall investment demand is low. Not only is gold coming off a
multi-decade secular bear so not many folks believe in it, but it
has no established momentum so only hardcore contrarians will even
consider it. Even in the States the total capital the contrarians
command is very small relative to the markets as a whole, so initial
gold buying on the local-currency devaluation is rather anemic and
makes for a tepid initial upslope.

Now after three or
four years of Stage One, Stage Two arrives. Stage Two marks a
momentous event when gold decouples from the local-currency
devaluation. In the case of our gold bull today, Stage Two will be
here when gold starts consistently rising faster than the dollar is
able to fall. This key decoupling works on multiple fronts to
really kindle investment demand around the world and marks the first
significant steepening of the parabola’s upslope.

Locally, the gold
and dollar decoupling in Stage Two leads to accelerating US dollar
gold prices. This draws in more American investors, who see the 66%
gold gains in the past few years compared to stock-market losses
over the same period of time. You can already see the great gold
marketing machine spinning up, with even CNBC and Fox News having
advertisements today heralding the new bull market in gold. The
slowly rising prices of Stage One that drew in the contrarians start
accelerating and gradually gold becomes known and sought after
outside of the small contrarian community.

Even more
importantly in Stage Two though, since gold’s gains start outpacing
the dollar’s losses gold starts rising in virtually all
currencies worldwide! Rather than appearing flatlined, a mere
product of the dollar’s misfortune, gold starts showing up on
foreign investors’ radars as it consistently carves new
local-currency gold highs around the world. And not surprisingly
foreign investors, who generally know how fragile governments and
fiat currencies truly are, are far more receptive to gold investing
and don’t need convincing like Americans.

Gradually these
foreign investors out of Asia and Europe start buying gold and
global investment demand accelerates. The more global capital that
is poured into gold, the faster its price rises tracking the
accelerating parabolic upslope. And of course the faster gold’s
price rises the more new capital it attracts. This virtuous circle
on a global scale is what fuels the strong gains of Stage Two, which
provocatively utterly dwarf Stage One. While gold went from $257 to
$427, or 66% higher in Stage One so far, it should trade
considerably above $1000 before Stage Two ends, or another 134%
higher from here!

After five or so
years of Stage Two gains, gold has a chance at going
ballistic in Stage Three. Stage Three is only ignited if the
general public around the world starts growing enamored with gold
investing. If you thought the dot-com mania was crazy, wait until
you see a global gold rush. All of us humans have an innate lust
for gold burning somewhere in our hearts and there is no rush like a
gold rush! Gold rushes define speculative manias!

When the gold bull
spreads beyond the usual investment class to the general public, so
much capital deluges into gold so rapidly that it is blasted
parabolic. Naturally a vertical upslope is totally unsustainable
and cannot last for much longer than a year at best. Stage Three is
a captivating time for the early contrarians who rode the entire
gold bull from its early Stage One days to its mania days. Vast
gains rapidly multiply, yet a sustained vertical ascent on a
long-term chart is a dire warning sign that the party will soon be
ending. Contrarians are torn between riding gold “just a little
longer” and immediately selling it all.

Not surprisingly
the greatest gains of all are found in Stage Three. Extrapolating
today’s bull-market data on a 1970s-style gold parabola, gold could
easily shoot from $1000 to over $3500 if the public enters
and ignites a popular speculative mania. This massive 250% gain in
Stage Three alone is roughly twice as great as Stage Two’s 134% and
four times as great as Stage One’s 66%! As the parabola model
suggests, secular bull gains multiply exponentially until the bubble
pops and the mania comes crashing down.

It is crucial to
realize that this unfolding secular parabola is totally dependent on
only one force, global investment demand for gold. Mines
just can’t wrest enough gold free from Earth fast enough to stop
this parabola once it is in motion and central banks’ relatively
small 20% control of global gold supplies isn’t enough to stop the
other 80% when goldlust spreads from contrarians to mainstream
investors to ultimately the general public.

And, unlike normal
demand profiles, gold investment demand only increases as
gold prices march higher in currencies around the world. The higher
the gold price goes, the more demand it spawns, at least until the
public jumps in, foments a bubble, and all the capital available to
chase gold is already in leading to the bubble bursting and the end
of the secular bull market.

If you note the
transition in the graph above from Stage One to Stage Two, it looks
like our current gold bull is almost there. For a variety of
reasons I agree and believe that Stage Two is probably right
around the corner today. I am even finding increasing empirical
evidence in my research suggesting that gold is now preparing to
lift into Stage Two leading to a vast surge in global investment
demand in the coming years.

If you are
interested in this key Stage One to Stage Two transition, please
consider subscribing
to our acclaimed monthly
Zeal Intelligence
newsletter.

In the
hot-off-the-presses September issue just published this week, I
detailed the actual evidence suggesting that Stage Two is near. In
addition I discussed the key market development, which you
can watch for yourself, that I believe has the highest probability
of signaling that Stage Two is upon us. And, as always, our letter
is full of actual stock and options trading recommendations to help
you ride this secular gold bull to legendary gains. If today’s bull
proves true to the parabolic historical form, then the vast majority
of profits still lie ahead!

The bottom line is
that today’s gold bull, over three years old now, is definitely a
secular specimen. Past secular gold bulls unfold in a massive
parabolic shape over a decade or so, driven by accelerating global
investment demand. This investment demand growth can be divided
into three distinct stages driven first by contrarians, then global
investors, and ultimately the general public.

So far our current
gold bull is tracking this model perfectly. Even better, increasing
empirical evidence suggests Stage Two is near so the upslope of this
secular gold bull is due to accelerate significantly in the years
ahead. Is your capital positioned and ready to ride this
accelerating secular gold bull?